- Bargaineering - http://www.bargaineering.com/articles -

IRS Pays Interest on Late Refunds

A few years ago, it became really popular to start writing about adjusting your withholding [3] so you didn’t get an enormous refund after you filed your tax return. It’s good advice and the main argument against over-withholding was that you were giving the IRS, technically the Treasury Department, an interest free loan. One thing I didn’t know was that in the event that the IRS underpays you, as a result of their error, they will actually pay interest you interest based on the same rates as what they charge taxpayers for underpayment. This is all governed by Section 6621 of the Internal Revenue Code [4].

The cases of underpayment by the IRS are rare. The IRS has forty-five days to process a tax return and will pay interest on your refund if it takes longer than forty-five days to process your return. If you are due a refund and you don’t file a return, the IRS won’t pay interest whenever you do. If you file a return, make a mistake that results in a greater refund, you might be paid interest. In those cases, it usually has to be an error that the IRS could’ve caught, like reporting of an expense that you failed to claim.

Finally, if you get examined or audited [5] and the results show that you were owed a refund, they will pay interest on that as well.